HONG KONG - In China, nearly
everything can be easily politicized. The stock
markets are no exception. As the stock-market
bubble continues to inflate, some people are now
tempted to make political interpretations.

According to one theory, what keeps the
retail investors and speculators bullish is their
belief that the government won't take harsh
measures to prick the bubble before or shortly
after the 17th

National Congress of the
Chinese Communist Party (CCP) in the autumn,
because Beijing wants to see people smiling during
the all-important meeting of the party elite. On
the other hand, a market crash would mean a big
loss of face for the party, and in that case heads
would roll, as some officials would be held
responsible.

It happens that Executive
Vice Premier Huang Ju is in hospital suffering
from pancreatic cancer, and he was rumored earlier
to be dead. Hence his job of overseeing the
country's financial and economic affairs,
including the stock markets, has been taken over
by Premier Wen Jiabao personally.

So
according to that theory, a stock-market bubble
burst shortly before the 17th Party Congress could
be used as an excuse by Wen's political enemies to
attack the premier at the meeting, which could
jeopardize his position. Even a bubble bursting
shortly after the meeting could be a big source of
embarrassment for Wen.

While those who
subscribe to this theory in general may read too
much into the stock-market bubble by relating it
to power struggles within the CCP, they do make a
good point that the Chinese government does not
want to see a market crash either before or after
the 17th Party Congress. In this regard, it
behaves like other governments in the world:
trying to let the market bubble deflate gradually
to avoid a social and economic jolt. This is
despite the fact that a market bubble is often, if
not always, beyond government control.

This may explain why the Chinese
government, like the Japanese government in the
late 1980s and the Hong Kong government in 1997,
still refrains from taking "heavy-handed" measures
to deal with the stock bubble.

In fact,
opinion among Chinese officials may be split on
whether the current stock markets are too
speculative.

It was Cheng Siwei, a vice
chairman of the Standing Committee of the National
People's Congress, who in January was the first to
talk about "the formation of a bubble" in the
stock markets due to speculation.

However,
two weeks ago, Shang Fulin, chairman of the China
Securities Regulatory Commission (CSRC), said the
assertion that "all people are speculating in
stocks" was an exaggeration by the media. Although
the number of investor accounts exceeded 90
million, some 30 million were in fact inactive or
"dead" accounts. And the active 60 million-plus
accounts were in fact held by 30 million
investors, as an active investor would normally
open accounts in both the Shanghai and Shenzhen
bourses. Hence active traders in stocks would only
be about 30 million.

As if to echo Shang's
view, Wang Zhongming, director of the research
center under the state-owned Assets Supervision
and Administration Commission, publicly commented
around the same time that "all people speculating
in stocks is a hugely good thing". The market
economy is a free economy under supervision, so it
is good, according to Wang, for more and more
people to participate in the capital market,
taking their savings out of the banking system to
reduce banks' excessive liquidity.

Last
Friday, Xiang Huaicheng, a former finance minister
who is now chairman of the National Council for
the Social Security Fund, said it was hard to know
whether there is a bubble in the stock markets.
Stock markets are like beer, so it is acceptable
to have some bubbles, according to him.

Whether these officials' views reflect
what Wen is thinking, no one knows. But when Wen
addressed the opening of the annual meeting of the
African Development Bank in Shanghai on May 16, he
did not appear worried about the stock markets at
all. Instead, he said his government was confident
about pursuing the steady and stable development
of China's capital market.

Analysts say
that Wen, speaking so confidently, must have a
good plan in mind for dealing with the current
situation facing the stock markets. So what is
Wen's plan?

It is unlikely to focus on
using monetary-policy instruments. The central
bank has repeatedly raised commercial banks'
deposit-reserve ratio to tighten credit, which has
been ineffective at cooling down the stock
markets. Nor has the slight interest-rate hike two
weeks ago deterred investors. Chinese citizens
still hold savings deposits of more than 17
trillion yuan (more than US$2.2 trillion) in
banks, and such moderate monetary-policy measures
could hardly affect their enthusiasm for trading
in shares.

It is more likely that Wen's
plan, if indeed he has one, will focus on the
increased supply of shares on the Shanghai and
Shenzhen bourses to meet growing demand. From the
market point of view, the current bubble has
largely formed as a result of short supply.

Let statistics speak here. On April 22,
there were 1,436 A-share companies listed on the
stock exchanges in Shanghai and Shenzhen, with
capitalization totaling 17.46 trillion yuan.
However, of the total capitalization, only 5.66
trillion yuan, or 32.4%, came from tradable
shares, while the rest, nearly 70%, came from
state